How should start-ups think about salary increments during crunch periods like now?

Three years ago, a 20 to 30 per cent annual pay raise would seem pretty routine. Tech salaries have been increasing for many years, and this accelerated during the pandemic.

But last year, increments suddenly stagnated. 

The FED’s interest rate hikes led to a tech winter and funding freeze. Start-ups became more cash-strapped, and venture capitalists began to put more pressure on start-ups to push towards profitability and extend their runway.

This phenomenon looks set to continue into 2024. But Vinod Dontimalla, Group Human Resources Director of Insurtech firm Igloo believes compensations are not in decline. It is merely a correction, he said.

“In 2020 and 2021, there was a huge spike in salary increments and hiring because of the Covid-tech boom, market demand and skill scarcity. Post-pandemic, that tech bubble has burst and we are normalising towards 2019 increment rates. The salary increments will slow down, but it will not be negative,” he explained.

“The salary increments will slow down, but it will not be negative.”

- Vinod Dontimalla, Group Human Resources Director of Insurtech firm Igloo

Across the board, employees are feeling the impact. 35 per cent of tech talent were dissatisfied with their salaries in 2023, and 93 per cent said they were either looking for a new job or willing to hear about a relevant new opportunity, according to a recent report by US tech career marketplace Dice.

This was amidst industry-wide lay-offs. 

“People are scared of losing jobs, there are some who had lost jobs and been jobless for six months or a year. And yet, there are also people dissatisfied about not receiving as much bonus as the year before. Overall, performing companies want to strike a balance between cash burn and having enough runway" said Vinod.

Founder and CEO of generative AI startup 1Bstories Anuvrat Rao, who is in the midst of a performance review shared: “Culturally, there is the expectation of a salary increase after performance review. So it is going to be a tough conversation.”

With human capital being the backbone of any company, how should founders and human resource leaders approach salary increases during a funding winter to motivate and retain staff? ConnectOne puts together 5 suggestions for employers to consider during these challenging times.

#1 Benchmark not only against the Market but also your Financial Health

Instead of benchmarking against salary increments of previous years when funds were flowing freely, benchmark your salary increments against the current market. For starters, Glints Southeast Asia Startup Talent Report will give you a broad view of hiring trends and compensation data. You could also tap into your personal networks to get a reading on market rates, ​​said Bertrand Wong, Total Rewards Lead at Glints.

That said, Vinod suggested using market rates only as a benchmark. It should not be a key determining factor for each company’s compensation packages.

“While I address the market when discussing compensation, I let employees know that compensation is based on our organisation’s financial health. I am not taking the opportunity to pay people less just because the market is not great and people don’t have options.

“The top performers should still get as much bonus as we can afford, regardless of what is happening in the market. That builds trust with employees,” he said. 

#2 Prioritise Core Talent 

“Look at resources as a whole, and reallocate resources, if necessary”

- Joelle Pang, General Manager of FastCo Malaysia

Rather than focusing on a broad-based increment across the board, budget more for top performers, as well as talents with niche skills critical for business priorities and growth. Also consider ad hoc retention schemes to retain talent involved in critical projects, at least till the projects are completed, said Bertrand, who has experience in both start-ups and multinational companies.  

“Know who your missionaries and mercenaries are,” added Joelle Pang, General Manager of FastCo Malaysia. “For missionaries – people you simply cannot lose because of their wealth of knowledge – do your best to retain them even if it means a salary increment during these tough times, especially if they have not been fairly compensated. Look at resources as a whole, and reallocate resources, if necessary,” 

This is important even for companies that have had a bad year and are struggling with runway.

“If you can’t save the entire ship, choose your key people and retain them by paying them on par with the market. No one will take 20 to 30 per cent less for a company for a long period of time just because they like the company,” said Vinod.

#3 Motivate in non-monetary ways 

“Compensation is not the only factor in talent retention. Career development and growth are also key priorities for talent.”

- Bertrand Wong, Total Rewards Lead at Glints.

Share Your Vision

If the company is doing well, remind employees of that. “Communicate the direction you are going towards, how you are approaching it and how far you are from achieving it. People tend to talk about these things only within the management team. But this is important for all employees to know so they can see a long-term future with the company and remain motivated,” said Vinod.

Even if it has not been the best year for your company, don’t be afraid to be vulnerable and honest with your team, added Joelle.

“Tell them, times are tough so this is the sacrifice you will be making collectively. If possible, tell them how much more compensation senior leaders are giving up comparatively. Show them how their sacrifice will contribute to strategies that will help them see a brighter day down the line. That can be reassuring,” she said.

Be concrete about what success will look like for your company – such as finding product-market fit and turning profitable – and when they can expect more substantial salary increases, said Anuvrat.

Communicate Growth Opportunities

Compensation is not the only factor in talent retention. Career development and growth are also key priorities for talent. Invest in talent development initiatives, and think a little bit further about succession planning and career pathway for talent, said Bertrand.

In some cases, this can also necessitate a shift in perspective.

“Sometimes, there is an intangible cost to the company to enlarge a colleague's job scope even before we know if this person is able to do it. It's almost like they're paying them to experiment in this new role. This should be communicated well to staff so that they do not think you are giving them more work without increasing their pay,” said Joelle.

#4 Address Inflationary Pressure

Even if your company cannot offer broad-based increments this year, it is good to address cost of living and inflationary pressures. “We look at annualised inflation and think of how to address this holistically through salary review cycles,” said Bertrand.

This does not have to be via salary raises per se. “For example, if there are certain areas where there is more inflationary pressure such as healthcare cost, you can boost benefits there and provide bit more flexibility for claims to help ease the pressure,” he added.

#5 Increase ESOP Rather Than Salary

To increase total compensation without compromising runway, give top performing talent more ESOP, rather than increasing base salary, suggested Vinod. “The chances of ESOP increasing in value is a lot higher in an early stage startup. So deliver your company vision, and communicate how value creation over a period of time will compensate for any salary increment compromises during this period.”

If all the above fails and you are unable to retain, reframe your thinking and take this as an opportunity to upgrade and solidify your team

“In today's market, we can also hire more easily than in 2021 when good talent was expensive. So if you lose people, it might be an opportunity to potentially trade up for the same cost.”

- Founder and CEO of generative AI startup 1Bstories Anuvrat Rao

Even after you have communicated your vision and looked into these other factors, there will still be people who choose to leave if there is a widespread pay freeze. You cannot control that, but you can manage the exodus, said Joelle.

This may not necessarily be a bad thing. “It will help you distinguish who are the ones really here for the mission, and who are the fair-weathered employees,” she said.

Anuvrat shared a similar sentiment. “In today's market, we can also hire more easily than in 2021 when good talent was expensive. So if you lose people, it might be an opportunity to potentially trade up for the same cost. It will mean the loss of some institutional knowledge and some transitionary challenges, but for the most part, it will be fine,” he said.